COMPANIES AND SECURITIES LAW 77947 Week 2 1 WEEK 2 TOPIC Impact of incorporation Registration (incorporation) and its effect Lifting the veil of incorporation Constitution and Replaceable Rules Promoters 2 FROM LAST LECTURE – COMPANY ￠ An artificial entity recognised by the law as a legal person with rights and liabilities. S124 says that it has powers in excess of the individual. ￠ It has Shareholders (aka members) – regarded as the owners of the company and usually enjoys limited liability. ￠ It has Directors – usually given the power to control the management of the company’s business. Note: Companies and Corporations are used interchangeably BUT strictly: A company is a type of corporation 3 FORMING COMPANIES Companies are registered or “incorporated” under the Corporations Act 2001. Requirement for registration – maximum size of partnerships is 20, but certain professional practices can have more partners Company registration: Figure 2.1 4 COMPANY REGISTRATION – SEE FIG 2.1 ￠ Select type of company ￠ Select names: limitations, reserving name ￠ Obtain consents of proposed members, directors and secretary ￠ Select registered office: consent ￠ Constitution or replaceable rules Obtain agreement of members ￠ Lodge application Pay application fee ASIC issues certificate of incorporation 5 POST REGISTRATION – SEE FIG 2.2 ￠ Appointment of directors and secretaries ￠ Common seal ￠ Registers ￠ Minute books ￠ Issue of shares ￠ Notice of details of directors and secretary ￠ Financial records and auditor ￠ Use of name ￠ Public officer ￠ Bank account 6 ASIC NOTIFICATIONS – SEE TABLE 2.1 ￠ Issue of shares: 28 days ￠ Changes location of register: 7 days ￠ Changes registered office/PPB: 28 days ￠ Change director/secretary: 28 days ￠ Change name/address of director/secretary: 28 days ￠ New/changed details of ultimate holding company: 28 days ￠ Incidental changes register: as determined by table in 178D 7 WEEK 2 TOPIC Impact of incorporation Registration (incorporation) and its effect Lifting the veil of incorporation Constitution and Replaceable Rules Promoters 8 WHAT/HOW MANY COMPANIES ARE THERE ￠ Approximately 2 million companies registered. ￠ The majority operate small businesses. ￠ There are significantly more proprietary companies than public companies. ￠ More than 2000 companies listed on the ASX. ￠ Company groups – common for large-scale businesses. ￠ Why are companies so popular Read Text at 2.285-2.345 for comparison between company, partnership and trust. 9 WHAT ARE COMPANIES USED FOR ￠ Companies – mainly used to conduct a business. ￠ But why is it popular Provides tax advantages. Provides limited liability for shareholders. Risk Management – Companies can quarantine their major assets and most profitable divisions in separate companies (subsidiaries) away from the more risky operations (separate legal entity). Risk Management – Individual persons can keep their various businesses and assets separate (separate legal entity). 10 DISADVANTAGES OF COMPANIES ￠ Set up costs may be more than other business structures. ￠ Possible continuing reporting and disclosure obligations. ￠ Ongoing administration costs including compliance costs may be more than other business structures. ￠ Directors and Officers (management) are subject to strict duties to outsiders and to the company itself. 11 CONSEQUENCES OF REGISTRATION ￠ Company is a legal entity separate to the owners (shareholders), directors and managers, employees. An artificial person with all the rights of a person (s 124 ) including owning property, entering into contract , sue and be sued, and more. Favourable structure for raising capital ￠ Limited liability for shareholders. Facilitates enterprise Reduces monitoring by shareholders and co-directors Promotes market efficiency Encourages equity diversity 12 COMPANY AS A SEPARATE LEGAL ENTITY ￠ Saloman v Saloman [1897]: LHW 2.50 ￠ Lee v Lee’s Air [1961]: LHW 2.60 Sole shareholder, sole director, can also be employee ￠ Macaura v Northern Assurance [1925]: LHW 2.70 Saloman’s principle working against shareholders ￠ Walker v Wimborne [1976]: Saloman’s principle and corporate groups 13 WEEK 2 TOPIC Impact of incorporation Registration (incorporation) and its effect Lifting the veil of incorporation Constitution and Replaceable Rules Promoters 14 LIFTING THE VEIL OF INCORPORATION ￠ In some instances, the law will allow the “veil of incorporation” to be pierced/lifted, to make shareholders or directors liable for debts of a company ￠ Piercing the veil in statute: Insolvent trading Uncommercial transactions Security interests granted by officers Financial assistance Tax legislation ￠ Lifting the veil at common law occurs in cases of fraud, avoidance of legal obligations and involvement in breach of directors duties (see cases in LHW 2.140-2.185) 15 LIFTING THE VEIL OF INCORPORATION – GROUP COMPANIES ￠ Instances where groups treated as one: Insolvent trading Consolidated financial statements Tax consolidation Directors’ duties – benefits of group as a whole Pooling in liquidation ￠ Subsidiaries as agent for holding company: Principle of Smith Stone & Knight v Birmingham [1939]: see 6 points in LHW 2.230 ￠ Tort liability: Possibly, but not in this case: Briggs v James Hardie Som
etimes in employment cases: CSR v Wren (1997) and CSR v Young (1998). But not in James Hardie v Hall (1998) 16 WEEK 2 TOPIC Impact of incorporation Registration (incorporation) and its effect Lifting the veil of incorporation Constitution and Replaceable Rules Promoters 17 RULES GOVERNING THE INTERNAL MANAGEMENT OF COMPANIES ￠ Pre-1 July 1998 companies had two-part management arrangement – it was called: memorandum of incorporation articles of association ￠ Companies formed Post-1 July 1998 s. 134 use now: replaceable rules (s 135) and s141 or their own constitution or combination of both 18 REPLACEABLE RULES (REP RULES) – S 135 ￠ Sections of the Corporations Act ￠ A table of such rules can be found at s 141 (see LHW 4.15) ￠ Most RR are applicable to all companies. However, some apply only to proprietary companies Some rules are mandatory for public companies (proxy appointment) ￠ RR are not used in following instances: One person proprietary companies Companies limited by guarantee No liability companies 19 THE COMPANY’S CONSTITUTION ￠ Post-July 1998 companies – single document Adoption on formation – consent of proposed members – s 136(1)(a) Adoption after formation – special resolution – s 136(1)(b) Ordered by the court ASIC lodgment – s 136(5) – only public companies Copy to members on request – s 139 20 CONTENTS OF CONSTITUTION ￠ No prescribed requirements ￠ Statement of company’s objects optional ￠ Purpose of objects clause ￠ Doctrine of ultra vires (now abolished) s 124: company has full legal capacity Constitution may contain restrictions/prohibitions on exercise of powers: s 125(1) Constitution may also contain “objects”: s 125(2) 21 ALTERING THE CONSTITUTION ￠ Adopt constitution – s 135(2) ￠ Company may modify or repeal const by special resolution – s 136(2) 75% of members ￠ ASIC lodgment of resolution – s 136(5) public company 22 LIMITS ON ALTERATION OF CONSTITUTION ￠ Corporations Act: Entrenching provision – s 136(3) s 140(2) restrictions Variation of class rights: ss 246B-246G s 232 oppressive/unfair conduct ￠ In Equity: Gambotto v WCP (LHW 4.220) – Alteration to expropriate shares: ￠ Must prove a proper purpose ￠ And must show fairness 23 EFFECT OF CONSTITUTION AND RR ￠ Effect of non-compliance s 135(3) – a failure to comply with the RR or constitution is not a contravention of the Act Not a criminal offence, civil liability and injunctions do not apply RR and constitution have the contractual effect binding the parties designated in s.140 24 STATUTORY CONTRACT ￠ S 140(1): The constitution and RR have effect as a contract between company and each member between company and directors/secretary between 1 member and each other member ￠ Must observe and perform the constitution and RR as far as they apply to that person. 25 CONSEQUENCES OF BREACH: CONTRACT BETWEEN MEMBERS AND COMPANY ￠ Company can force members to comply with constitution Hickman v Kent or Romney Marsh (LHW 4.90) ￠ Members can force company to comply with constitutional provisions that affect them in capacity as members E.g. RR s 250E – shareholder’s right to vote: Pender v Lushington, Wood v Odessa Waterworks (both mentioned LHW 4.95) Eley v Positive Govt Security (LHW 4.105) ￠ Outsiders cannot force compliance with the constitution: Forbes v NSW Trotting Club (LHW 4.120) 26 CONSEQUENCES OF BREACH: CONTRACT BETWEEN DIRECTOR/SECRETARY AND COMPANY ￠ Provisions applicable to directors/secretary, e.g. replaceable rules s 201G appointment of directors s 202A remuneration of directors ￠ Employment contracts: Wholly within constitution are vulnerable: Shuttleworth v Cox Still liable for damages if contract outside constitution: Allen v Gold Reefs (LHW 4.160), Carrier v Hunt (LHW 4.165) 27 CONSEQUENCES OF BREACH: CONTRACT BETWEEN MEMBERS AND OTHER MEMBERS ￠ Provisions applicable to members e.g. Compulsory acquisition of minority interest: Re Caratti Holding Co (LHW 4.130). However, this was ultimately held to be oppressive e.g. pre-emption clauses in constitution on sale of shares: Gibbins Investments v Savage (LHW 4.132) ￠ But: Andy Kala v E J Doherty (LHW 4.140), professional body rules on non-poaching of clients are not agreement between members as members 28 REMEDIES ￠ The most common remedy used where there has been a breach of the constitution is the Injunction or Declaration 29 WEEK 2 TOPIC Impact of incorporation Registration (incorporation) and its effect Lifting the veil of incorporation Constitution and Replaceable Rules Promoters 30 PROMOTERS AND PRE-REGISTRATION CONTRACTS ￠ A promoter is a person who is involved, actively or passively, in forming a company, raising its capital and establishing its business ￠ Promoters owe fiduciary duties to companies: act in best interests of company, disclose conflicts cannot make secret profits ￠ The nature and extent of the promoter’s interests in the company’s formation and any property acquired by it must be disclosed in a prospectus if the company seeks capital ￠ Pre-registration contracts may be enforced by the outside party against the company after registration or against the person who entered into them 31 WEEK 2 TOPIC Impact of incorporation Registration (incorporation) and its effect Lifting the veil of incorporation Constitution and Replaceable Rules Promoters 32